The effects of trade tariffs on the European economy

3 questions to Thilo Brodtmann, Chief Executive Officer of VDMA

What must European policy do to break the ice with America again? Will more penalties be of help or should a conflict-free solution with the USA be pursued?

From our point of view, the most viable way forward in the dispute with the USA would be a new attempt at a free trade agreement. Even if TTIP has failed for the time being, this must not obscure the point that a free trade agreement with the USA would be sensible. The next attempt should be limited specifically to those issues that are acute and offer little cause for dispute in order to make faster and better progress - namely the remaining reduction of customs duties.

Above all, we must also remove the technical obstacles on the way to free trade.

We hear signals from the USA that one could talk about such a "small" free trade agreement for industrial interests. This way we would get to the root of the problem.

Let us assume that the European industry has to live with the new tariffs in the long term. Which consequences will this have for the economy?

Punitive tariffs have the characteristic that they tend to escalate - if it starts somewhere, the penalties increase at all ends of the earth. This is exactly the danger we want to avert. For this reason, this vicious circle should be broken from the outset and other paths should be taken, for example, in the form of the small free trade agreement just mentioned. It is correct that certain tariffs vary in the USA and Europe, for instance, in the automotive industry. In order to shorten the whole issue, we should actually be talking about substantial trade barriers and tariff dismantling. This is most likely to happen if we do not threaten each other but negotiate seriously with each other.

Are there already trends in the German economy despite the short period of effect of the customs duties?

Up to now, the US tariffs have only been imposed against China, which is not really having any effect on us yet. The extent to which individual companies are affected would also vary greatly. However, we mechanical engineers do have a sword of Damocles hanging over our heads, because a trade war cannot be ruled out. At the moment the trade with the USA is going quite well. The USA is one of the most important trading partners for mechanical engineering and our largest single sales market. In this respect, we are very interested in continuing to have open markets on both sides.

Will the trade war also have indirect effects on other sectors of the economy?

That depends: How is the arms race developing in terms of customs? If the motto were “tit for tat", then the next step would be for the EU Commission to look for possible sanctions. That in turn would challenge the United States. I do not even want to imagine how this could end. Indirect consequences of a trade war are therefore quite conceivable.

How will the punitive tariffs hurt the US itself? Will the "America First" approach cost the country dearly?

This will surely be the case. Any punitive tariffs or trade barriers imposed by a country are at most of short-term benefit to the domestic industry. Distortion of competition is caused by the fact that offers from abroad become more expensive. Domestic industry relaxes under this protective shield and loses its competitiveness. Furthermore, many products must continue to be purchased from abroad despite the customs duties, because they are not manufactured within the country in the required quality. In this respect, protective walls are always to the detriment of the countries that erect them. This is why you should always keep your hands off it. At some point, the pendulum will swing back and then it will become expensive for the domestic economy.

About:

Thilo Brodtmann is Chief Executive Officer of the German Engineering Federation (Verband Deutscher Maschinen- und Anlagenbau). He represents around 3,200 members in their national and international interests. The business graduate has been working for the VDMA since 1991.